Thursday, 11 September 2014

Scotland and the SNP: Fooling yourselves and deceiving others

There are many laudable reasons to campaign for Scottish
independence. But how far should those who passionately want independence be
prepared to go to achieve that goal? Should they, for example, deceive the
Scottish people about the basic economics involved? That seems to be what is
happening right now. The more I look at the numbers, the clearer it becomes
that over the next five or ten years there would more, not less, fiscal
austerity under independence.

The Institute for Fiscal Studies is widely respected as an
independent and impartial source of expertise on everything to do with
government spending, borrowing and taxation in the UK. It has produced a
detailed analysis (recently updated) of the fiscal (tax and
spending) outlook for an independent Scotland, compared to what would happen if
Scotland stayed in the UK. It has no axe to grind on this issue, and a
considerable reputation to maintain.

Their analysis is unequivocal. Scotland’s fiscal position would
be worse as a result of leaving the UK for two main reasons. First, demographic
trends are less favourable. Second, revenues from the North Sea are expected to
decline. This tells us that under current policies Scotland would be getting an
increasingly good deal out of being part of the UK. To put it another way, the
rest of the UK would be transferring resources to Scotland at an increasing
rate, giving Scotland time to adjust to these trends and cushioning their impact.
Paying back, if you like, for all the earlier years when North Sea oil
production was at its peak.

The SNP do not agree with this analysis. The main
reason in the near term is that they have more optimistic
projections for North Sea Oil. The IFS analysis uses OBR projections which have
in the recent past not been biased in any one direction. So how
do the Scottish government get more optimistic numbers? John McDermott examines
the detail here, but perhaps I can paraphrase his
findings: whenever there is room for doubt, assume whatever gives you a higher
number. In my youth I did a lot of forecasting, and I learnt how to be very
suspicious of a series of individual judgements all of which tended to move
something important in the same direction. It is basically fiddling the
analysis to get the answer you want. Either wishful thinking or deception.

I personally would criticise the IFS analysis in one respect.
It assumes that Scotland would have to pay the same rate of interest on its
debt as the rUK. This has to be wrong. Even under the most favourable
assumption of a new Scottish currency, Scotland could easily have to pay around
1% more to borrow than rUK. In their original analysis
the IFS look at the implications of that (p35), and the numbers are large.

So what would this mean? Could Scotland just borrow more? I am
all for borrowing to cover temporary
reductions in income, due to recessions for example, which is why I have been
so critical of current austerity. However, as the IFS show, North Sea oil
income is falling long term, so this is not a temporary problem. Now it could
be that the gap will be covered in the longer term by the kind of increases in
productivity and labour supply that the Scottish government assume. Governments that try to borrow today
in the hope of a more optimistic future are not behaving very responsibly.
However it seems unlikely that Scotland would be able to behave irresponsibly,
whatever the currency regime. They would either be stopped by fiscal rules
imposed by the remaining UK, or markets that did not share the SNP’s optimism
about longer term growth. So this means, over the next five or ten years,
either additional spending cuts (to those already planned by the UK
government), or (I hope more realistically) tax increases.

Is this a knock down argument in favour of voting No. Of course
not: there is nothing wrong in making a short term economic sacrifice for the
hope of longer term benefits or for political goals. But that is not the SNP’s
case, and it is not what they are telling the Scottish people. Is this
deception deliberate? I suspect it is more the delusions of people who want
something so much they cast aside all doubts and problems.

This is certainly the impression I get from reading a lot of
literature as I researched this post. The arguments in the Wee
Blue Book are exactly that: no sustained economic argument, but just
a collection of random quotes and debating points to make a problem go away.
When the future fiscal position is raised, we are so often told about the past.
I too
think past North Sea oil was squandered, but grievance does not put money into
a future Scottish government’s coffers. I read that forecasting the future is
too uncertain, from people who I am sure think about their future income when
planning their personal spending. I read about how economists are always
disagreeing, when in
this case they are pretty united. (Of course you can always find a few who
think otherwise, just as you can find one or two who think austerity is
expansionary.)

When I was reading this literature, I kept thinking I had seen
this kind of thing before: being in denial about macroeconomic fundamentals
because they interfered with a major institutional change that was driven by
politics. Then I realised what it was: the formation of the Euro in 2000. Once
again economists were clear and pretty united about what the key macroeconomic
problem was (‘asymmetric shocks’), and just like now this was met with wishful
thinking that somehow it just wouldn’t happen. It did, and the Eurozone is
still living with the consequences.

So maybe that also explains why I feel so strongly this time
around. I have no political skin in this game: a certain affection for the
concept of the union, but nothing strong enough to make me even tempted to
distort my macroeconomics in its favour. If Scotland wants to make a short term
economic sacrifice in the hope of longer term gains and political freedom that
is their choice. But they should make that choice knowing what it is, and not
be deceived into believing that these costs do not exist.

60 comments:

The demographics don`t show much difference between Scotland and rUK over next 5 years (starting to be a gap by 10 years). The IFS report was generated using ONS2010 and published about a week before ONS released 2012 figure. The IFS never updated it to reflect the much more optimistic ONS2012 figures - but they did update it to reflect a new, more pessimistic, OBR forecast for oil revenues.

Many have called in to question the OBR, check out this article http://newsnetscotland.com/index.php/referendum/9449-just-who-exactly-are-the-obr-and-are-their-forecasts-on-oil-believable

I have fact checked a few of the claims here and it really does seem the OBR is politically driven at least on this issue, additionally they don't have a great track record of forecasts, and the HMRC were commissioned to 'create' this forecast.

The article you link to is, I'm afraid, an example of the level of analysis on the Yes side that I talked about in this post. First, lack of knowledge - in this case about how the OBR works and about forecasting. Second, a tendency to play the man rather than the ball - attempts to associate the OBR with Osborne and that it is part some some great conspiracy. Third, a failure to do proper analysis, and instead rely on random quotes. Contrast this with the McDermott piece I linked to.

The oil objection is pretty moot in any case. Whatever estimate we believe, we know oil production is declining and will start to decline quite sharply within around 15-20 years (short of a new discovery - and "we might find some more oil" isn't much of an economic plan). Scotland's taxation revenue without oil isn't going to be able to sustain its current spending within the UK, even ignoring any other issue (currency, unfavourable demographic trends, short-term economic hits of creating a new country, benefits of pooling resources, etc.) Scotland's revenue with oil is barely able to sustain current spending as it is if production stays at the level it was at last year, for instance.

So any long-term argument largely rests on issues that have nothing to do with independence - namely hoping an as yet unelected government will pursue policies capable of compensating for all of these negatives. The underlying structure of the economy would indicate that independence is in no way in Scotland's interest, but we're witnessing a kind of conga line into poverty being whipped up by SNP politicians (the only people who we can be certain will actually benefit from a Yes vote materially).

Will common sense prevail? Who knows, but my feeling talking to people around me in Scotland is that it won't and we'll be living with this mistake for a very long time indeed.

Given the likely narrowness of the forthcoming General Election, it would be suicidal for Labour to mess with Barnett, and equally dangerous for the Tories to hand Labour such an obvious advantage. Further, in the event of a close No vote, it would be quite clear that the threat of independence is still present. The onus would be on whoever wins in the next election to prove that the UK can be made to work, that the present popularity for Yes is an abberation created by an immensely unpopular (across the entire UK) Tory government.

Quebec after all had two independence referendums 15 years apart. Scotland itself had referendums in 1979 and 1997. As long as the SNP remain popular, the threat of further independence referendums would be a check on any negative moves on Scottish sovereignty. A No vote from the Scottish public would be a time-limited chance for the UK government to prove that it can deliver good government, and erode Independence fervour.

begging your pardon but the immensely unpooular tories were preceeded by the immensely and economically bereft labour government. Re the 1979 election, the result was 51% YES. Since this was an inconvenience for Thatcher she decided that not enough people had voted and it was declared a NO vote. I have no doubts having see the hatch job that Nick Robinson did in editing out Alex Salmond's answers to him at that press conference that the same dirty tricks will be played this time.

It's unlikely because in the nationalist universe (where many Yes campaigners live) Westminster is something like the embodiment of Edward I in the film Braveheart. It generally functions not for its own benefit, but merely to ruin Scotland in any way possible.

I'm Scottish - I've even voted for the SNP in the past - and I judge this purely on the pragmatic economic case. I don't particularly mind which flag I live under. I can see a short-term economic mess followed by long-term malaise (oil will fall substantially after 2030 and Scotland's taxation revenues without oil are far below the level of spending it receives in the UK). The UK strikes me as an exceptionally good deal in the long-term, but my fear is we won't realise how good we had it until it's gone.

You might want to check your facts re "this was an inconvenience for thatcher". The referendum was held 1st March 1979. Margaret Thatcher came to power 5th May 1979. After an SNP led vote of no confidence in the sitting labour government forced a general election.

The IFS seem to be comparing the best case after a no vote - Scotland keeps the current fairly generous public spending arrangements - with the worst case after independence, ie the lowest oil estimates.

That has to be taken alongside beliefs like "We think that Westminster has been deliberately downplaying the potential of the UK Continental Shelf (UKCS) ahead of September’s referendum on Scottish independence." from Investors Chronicle http://www.investorschronicle.co.uk/2014/07/24/tips-and-ideas/share-tips/tips-of-the-week/north-sea-incentives-to-boost-enquest-MIfvyVzluLyGAzDJtEGrmO/article.html

And after the past few weeks much more likely that some tax powers will be devolved at the cost of a changed Barnett. The only change to Barnett that English regions and Wales will countenance is a "needs based" assessment which Holtham estimated would see Scottish Government budget cut by about £4bn.

The OBR's best guess is, I think, at the lower end of the scale and it's revised down because they over estimated recently. It seems strange to apply that to longer term forecasts that depend largely on assumptions about technological change and oil prices.

I think the UK's proposals for further devolution effectively get rid of the Barnett formula and with it additional spending, at least so far as it goes beyond a needs basis. (Which seems perfectly fair unless you're an 'it's our oil' nationalist.)

Also, public spending in the UK seems likely to be going down, so public spending in Scotland would also come down to if the Barnett formula remains as is.

Your reference to the formation of the Euro in 2000 is apt though. Fiscal issues are, I think, neutralish, but currency is the real weak point of the Yes campaign. I agree with Krugman, as I generally do, about desirability of currency union and about the lunacy of Sterlingisation. Best option is pegged currency in short term and floating in long term. Peg should be stable-ish over short term given current integration and a peg allows existing sterling denominated liabilities to be paid. New liabilities issued in Pound Scots. When appropriate, float.

But I think maybe the current positioning is a Salmond masterstroke to claim currency union so valuable. When it is given up in the post-ref negotiations, it looks like making massive concession. A "fair" outcome in my view would be to recognise that Scotland and rUK share a currency at the moment and that a pegged currency for Scotland is needed after indy. The cost of the reserves needed to defend a peg should be added to UK debt, which Scotland then takes population share of whole thing (this recognises every UK citizen´s right to per capita share of current assets and liabilities). Alternative is Salmond threat point which is to not take on share of UK debt and to use savings to fund required reserves.

I don't disagree with any of this, but I think it's dwarfed by the issue of the absence of a lender of last resort. How will the independent Scottish government raise debt? How will it do it when international lenders are not available? What happens under insolvency? What happens if a Scottish bank becomes insolvent? Who guarantees deposits?

It's a sad indictment of democracy that these issues get ignored in the euphoria of flag-waving.

Hume said "reason is, and ought only to be the slave of the passions" -- what he meant was that reason helps us work out how to achieve our desires; it does not determine what our desires are. In other words, it's impossible to reason our way to moral truths. He wasn't saying that our emotions cloud our judgement or something along those lines.

Almost 25 years ago, I was going on about how a conversion rate of one-to-one would be economically catastrophic in the reunification of Germany, for all the usual good economic reasons. My Japanese boss looked at me with a slight smile and flatly stated: politics always dominate economics, the issue is settled and it will be one-to-one. He was right and made me feel somewhat like a headless chicken. I don't know much about this debate - like anyone not carrying a UK passport, I was caught totally unaware - but do suspect that here too, politics - whichever way they lean toward - will dominate economics.

Very true that politics dominates economics here. If a majority of people in Scotland want to find sovereignty they will, and rational arguments will have only a limited impact. The point is whether the Yes campaign is honest. Sincerely, I suppose they're honest like all political campaigners ever are: they give the best arguments towards their goal, knowing that future is so hard to predict (what will be the oil reserves in the end?) that it can't give a certain answer in one way or the other.

As usual the IFS, along with the rest of main stream economists, still hasn't grasped how a fiat currency actually works.

"Scotland’s primary deficit – i.e. the gap between tax revenues and public spending excluding debt interest repayments – is forecast to be 2.8% of GDP in its first year of independence (2016–17) under our baseline scenario. Thus it would have to borrow to cover day-to-day spending even ignoring the amount needing to be spent on debt interest payments. Therefore, what interest rate lenders charge to the government of an independent Scotland will be a pertinent question, regardless of what share of the UK’s existing debt Scotland is required to service." (IFS)

Why would a sovereign fiat currency government that has the monopoly of issuing its currency (Scottish Pound say), want to borrow its own money. The only way you will be able to buy new Scottish government, so called, "debt" is with the Scottish Pounds. Where is the only place you can get Scottish Pounds from; the Scottish Government and its new Central Bank. Until the government SPENDS (that is how it ISSUES) new Scottish Pounds into existence, there won't be any to buy the "debt" with.

The government in Scotland as in the UK, does not have to issue debt "financial assets i.e. Gilts" it chooses to do this. It enables Pension; Insurance funds and rich people, to get free money, as interest, from the state. It also helps the central bank to control the "liquidity" (i.e. cash swaps) in the economy. The government could just as easily leave all its net spending (i.e. the dreaded deficit), at the central bank.

If Scotland "pegs" its new currency to some other currency, then you have to defend that peg. It will have to have foreign currency reserves to buy its own currency in the markets to keep its exchange rate at the peg. If it lets the currency float and find its own level, no need for foreign currency reserves and it definitely doesn't need to "borrow" in any foreign currency. Bond vigilantes, can't take on a country that ISSUES its own sovereign floating fiat currency. Acorn

WHAT sovereign fiat currency? The SNP refuses to permit their new Scotland a sovereign currency. The independence proposal features a Scotland which continues to use the British pound. That's one of the main problems both Krugman and SW-L have been complaining about!

I love that you believe you have a better grasp of the workings of fiat money than people who make it their daily business to understand such matters. Seeing as you're such a genius, how about identifying yourself?

If the fiscal outlook for Scotland post independence is worse than now, doesn't that mean that the fiscal outlook for the rUK is better? If so then if we non Scots take the advice we are giving to Scots to be rational and Say No, shouldn't we be encouraging them to Say Yes?

It's not a zero sum game. For example, the prospect of a bidding war with respect to the two sides both inappropriately cutting corporation tax to compete, can harm the fiscal situation of both sides. In terms of borrowing costs, that would rise as a response to increased risks, including the loss of diversification. There's no real sense in which increased riskiness of the Scottish economy would benefit the remainder of the UK. (The UK economy would also increase in volatility, but to a lesser extent.)

The central bank operates with a balance sheet, the same as the commercial banks. Assets have to balance with liabilities, the Treasury does not have this restriction.

The Treasury creates new "money" out of thin air by keystrokes into non-Treasury accounts at the commercial banks. It is issuing (by spending), brand new money; it is adding financial assets into the economy. It could be a pension payment or paying for an Aircraft Carrier.

That spending has created a liability for that commercial bank, it has no asset to balance it out on its balance sheet. The owner of that account could turn up and take the money out as cash; or, he could transfer it to another bank using internet banking say; but there is no asset on the balance sheet to be liquidated to fund it. So, when the Treasury dials that money into that account it has to dial an equivalent amount into the "reserve" account of that commercial bank. That reserve account is held at the BoE. If the account holder transfers that deposit to another commercial bank, the BoE will transfer an equivalent amount of "reserves" as well, to match an asset to a liability. All balance sheets now balance again.

The Treasury creates new money by spending; it will destroy that money when it gets it back as taxes. The government gets all its spending back as taxes eventually and destroys it. Taxes don't physically pay for anything. The trouble is, the private sector insists on saving some of it. The sum total of all the savings in the private sector and a little bit in the rest of the world, is exactly equal to the so called "national debt". Politicians have never noticed that, apparently!!!

In PLC terms, the Treasury and its Central Bank are one and the same. If the central bank buys Treasury Gilts for the equivalent amount of new cash (QE for instance); it is the same as if the Treasury had never issued those Gilts in the first place; they can be cancelled out of existence. What is left is the Treasury original spending. A deposit in some private sector account and an equivalent amount of "reserves" to balance it out at the central bank.

Think of Treasury / Central Bank "money" as "vertical" and Commercial Bank "money" (Credit) as "horizontal". The horizontal money always sums to zero. For every asset there is a liability. That is, every loan a commercial bank makes creates a deposit in someone's account (NOT the other way around). Vertical money comes from thin air and eventually returns to thin air. It is never really an asset or a liability; it is just a scorecard for all the players in the economy. It is FIAT. ATB Acorn.

We moan about UK politicians all the time, this blog does a lot of it with respect to Osborne.

However, the dissembling of the SNP in general, and Salmond in particular, is completely shocking. Far, far worse than you could get away with at UK level.

The big economic questions are, of course, public finances and the currency. On both there has been nothing but bluster. Nonsense about how the days of mass production of oil and gas can return, and how 'investment' (ie costs of extaction) are at an all time high.

The big political question is EU membership. On this we find precisely the same pattern. There is precisely one academic who take the view that the path for Scottish membership of the EU is smooth. Everyone else thinks the legal barriers to entry (membership of the euro, a central bank) and the political (opposition by Spain, Belgium and other states with separatist groups) are formidable. Not impossible to surmount, but the terms of Scottish entry will be tough. The Nats latch on to the view of the (very small) minority and ignore the objections.

Nationalism is irrational at heart and so it is not a surprise that Nationalist politicos play fast and loose with reality. All over the world Nationalism and religious dogma kill and reduce human happiness. We must hope the damage is minimised in the Scottish /UK case.

The irony of the home of the Scottish Enlightenment being used as a base for Nationalist separatism is lost on the SNP. Increasing trade and interdependence between nations is the very foundation of Adam Smith and Humian liberal ideas.

There're EU membership, why do commentators still go on about an assumed political opposition from Spain and other countries? All these countries voted in favour of Montenegro's membership of the EU. Montenegro which had just become independent after a referendum. So on what basis could Spain and these other countries veto Scotland? We say yes to Montenegro but we say no to Scotland does not seem credible.

The UK is an EU member state. The UK will remain an EU member state after Scotland leaves. Scotland is not an EU members state.

I am not very sure Montenegro is the kind of precedent we should be looking at.

It has been an applicant for membership for eight years, and negotiations towards membership finally began in 2012. It (unilaterally) uses the euro. Euro membership is of course a precondition of accession.

There are, of course, other parts of the former Yougoslavia that are already part of the EU.

"Euro membership is of course a precondition of accession." No - promise to implement the Euro when conditions are met is a precondition of accession, not having the euro before. The Scottish govt says Scotland will be immune to that because the opt-out gained by the UK during Maastricht will apply to them. I agree with you that nobody knows, hence that the Yes campaign is a bit disingenuous here.

Well, we do know. The opt out applies to the UK as a member state. Scotland would not be a member state, contrary to the claims of some, and would have no entitlement to the opt out.

Maybe euro membership could be opted out of, perhaps the other member states will agree to Scotland joining the EU without that, but the claim that there will be two member states when the UK is dissolved is just not true. The UK will continue as the member state. Scotland will just not be the UK, it will be a new state.

"The Scottish govt says Scotland will be immune to that because the opt-out gained by the UK during Maastricht will apply to them."

No chance. Even the UK wouldn't get that opt-out today if it applied as a new member state, which is what we would be doing. The EU would also want to avoid a de facto opt-out, as with Sweden, and the pressure will be on the Scottish government to accept all of the EU's demands if membership is to be finalised by May 2016.

Switzerland offers a model that the UK as a whole - and its component parts - should pay more attention to. A collection of 26 different states, each with its own taxation systems and tax rates, competing with each other for businesses and individuals to reside in them is a huge competitive boost to the economy.

Whitehall has had all the power for so long people have not even considered if alternatives might not be better. A shame this side of things wasn't discussed more in the run up to the vote.

Looking towards 2017 though, imagine rUK leaving Europe at a time when Scotland is joining. Where would all that foreign inward investment that picks the UK because it speaks English then go to? Do you think they would still pick rUK, or would an English speaking EU member such as Ireland or Scotland be more attractive?

Given that scottish social attitudes aren't all that different from the rest of the UK, how is creating an electoral situation dominated by two centre-left parties with barely any difference in between, an increase in democracy?

Yes is doomed but one silver lining would be to torpedo the flawed assumption that all new EU countries must promise to join the eurozone. Since the poundzone is much more clearly an optimal currency area for Scotland and England, why should Poland be forced into sharing a currency with Ireland and Portugal? Like Nancy Reagan would say - for euro or the divorce/secession - "Just Say 'No'" is the only rational conclusion (how they managed to call it 'independence' is crazy!)

Can some one tell me what is the status of the liabilities and assets of a "Scottish" bank with regard to the bank of England and its "responsibilities" that relocates its registered office address to England the day after a "yes" vote?

Does the "ratio of financial liabilities to Scottish GDP" magically decline?

I don't profess to know the finer points of economics, but if the oil is so scarce why would the markets react so negatively to Scotland leaving the UK? Surely it would either make no difference or would actually be a good thing?

The economic prospects for an independent Scotland are made much brighter by the fact that North Sea oil and gas has been very significantly under-taxed over the years. Paradoxically, the SNP maintain that the opposite is true but, if the vote were to go their way, one suspects that the compelling case for increasing petroleum taxes would strike them soon enough. This probably explains why the major oil companies have unequivocally come out against independence. For statistical analysis the above,see:

First of all - thank you for the contribution and comments. Much needed debate! Has anyone seen any projections on the contribution that will be made by the City of London financial services industry from 2030 - 2050? What are the risks to COL from emerging centers of power and wealth. What will be the attraction of London as the UK's historic and current wealth reduces? Is no white paper better than than a vague and optimistic one? I think, for many Yes voters, it's about making change now while there is still an oil resource. I think the optimism is a campaign tactic because the No campaign was always going to be so pessimistic. If we stay in the UK I'd like to see what the economic vision is and that hasn't been presented in this campaign.

How is this deception of basic economics working for you now? Now that the promise that the UK would be staying in the EU and Scotland would have to leave has been broken? Now that the huge order of ships that were to be built in the Clyde, none of it will be made in any of Scotland's dockyards? What about the failing oil reserves, that Scotland hardly sees a penny for, now that BP have said in 2017 it hopes to double North Sea oil production to 200,000 barrels by 2020?

There is more to Scottish independence than flag waving. Most of it has to do with propaganda and asset stripping, because that's what England will have to do now that the Tories have taken us down the Brexit route.

If Scotland had got its independence in 2014, it's highly probable the resulting furore would have prevented Brexit for the rest of the UK. In retrospect, I actually don't think 2014 was the best time for independence. Perhaps you have done something that helped prevent that happening at that time. The fact that it probably facilitated Brexit is quite ironic! LOL!

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